Should you protect against inflation with a five-year fix?

Fixing your mortgage for five years can inflation-proof at least part of your monthly outgoings, according to Moneyfacts.

The financial information provider suggested that now may be the time to think about fixing bills with inflation starting to bite and the cost of everyday goods rising.

Its research showed that the average five-year fixed rate mortgage at 75% loan-to-value (LTV) has fallen by 0.32% in just one year, meaning now might be the perfect time to lock into a long-term fixed rate deal.

Falling fixed rates

The average five-year fix for those with a 25% deposit is now 2.57% compared to 2.89% last April.

Borrowers with larger deposits (40% or more) have seen average five-year fixes fall from 2.60% a year ago to 2.39% today.

And those with a modest 10% deposit can also benefit from cheaper five-year fixes – on average 3.37% compared to 3.69% a year ago.

Charlotte Nelson, finance expert at Moneyfacts.co.uk, said: “The five-year fixed rate market has been improving for some time now, with lenders trying to differentiate themselves from the competition and offering a diverse mortgage range. This has caused rates to fall as providers compete to be the lowest in the market. For example, just two years ago the average rate at 90% loan-to-value was 4.41%, whereas now it stands at 3.37% – a shocking 1.04% less.

“With inflation rising above the Bank of England target for the first time in four years, it is easy to see that even if the Bank doesn’t raise its interest rate just yet, rising costs will soon take their toll on people’s pockets. Five-year fixed mortgages can play a vital role in protecting borrowers from the rising cost of living.

“Five-year fixed rates give borrowers some peace of mind, as they will know that their monthly repayments will remain unchanged for a significant period no matter what else happens.”

Switch and save

Moneyfacts also found that borrowers choosing to switch from their SVR to a five-year fixed rate deal could find themselves significantly better off.

It said that, based on today’s average SVR of 4.56%, if a borrower were to opt for the average five-year fixed rate at 60% LTV, they would be £232.30 a month better off (based on a £200,000 mortgage over a 25-year term).